But the Bond portion has two major questions....(and, that is AFTER putting aside the fear that Bonds COULD be at a high).

Assume I was investing $400,000 total. That would be $100,000 in each investment.

Now assume that at a future date I now have $140,000 in bond value and $86,667 in each of the other three investments.

I am now supposed to sell $40,000 worth of bonds and buy $13,333 of each of the other investments.

However, if I bought one T-Bond for $100,000 which is now worth $140,000 what am I doing? Am I selling the entire bond and then buying a new one for $100,000 since you cannot just sell part of a bond? Or, was I supposed to have originally bought four $25,000 bonds? Tonight I reread in Craig / Tex's book about buying the bonds and while the book is incredibly detailed in just about every other area there is zero detail regarding what I am asking here.

Second question. I buy a bond for $100,000 (or four at $25,000) which are now paying about 2% and the bonds are for thirty years. If these bonds do go down in value I am holding them for a full ten years (since that is when they get down to only being for twenty years)?

Doesn't that leave one in somewhat of almost a market timing position? I'm buying today and selling on one day exactly ten years later? Just those two data points are going to determine whether or not I made a good or bad investment? And, if interest rates end up being consistently higher during those ten years than my initial rate then I'm getting interest income at a real rate that is less that the present real rate for the entire ten year period?

I'm an experienced holder of cash / equities / gold. But my ONLY bond holding has been the Vanguard Short Term Investment Grade, which parallels the current interest rate scene.

To just make one bond purchase and then sell it exactly ten years to the day later seems to be a major bet / gamble. Unlike any other investment I have ever prior made.

And, now getting back to the current bond "high". Buying a bond when the interest rate is presently so low (less than 2.0%) it seems that the only way I can make money during the next ten years on this bond purchase is if there is some serious deflation which drives interest rates even lower.

I can well see how the stock and gold investments can lead to big major gains going forward. It's quite cloudy to me how buying the bonds at today's rates has any kind of probabilities of providing significant gains in the future to offset any losses on either stocks or gold or both.

Re: The Bond Purchase Question!

Assume I was investing $400,000 total. That would be $100,000 in each investment.

Now assume that at a future date I now have $140,000 in bond value and $86,667 in each of the other three investments.

I am now supposed to sell $40,000 worth of bonds and buy $13,333 of each of the other investments.

However, if I bought one T-Bond for $100,000 which is now worth $140,000 what am I doing? Am I selling the entire bond and then buying a new one for $100,000 since you cannot just sell part of a bond? Or, was I supposed to have originally bought four $25,000 bonds? Tonight I reread in Craig / Tex's book about buying the bonds and while the book is incredibly detailed in just about every other area there is zero detail regarding what I am asking here.

When you buy a bond from a broker, you typically buy them in lots of $1000 (and I believe from Treasury Direct you buy them in lots of $100). So in your example of $100,000 initially in bonds, you would have bought 100 lots. If you had to sell $40,000 worth, you'd be selling about 30 lots out of your 100. Each lot would now be worth $1400. It's not something to worry about.

Second question. I buy a bond for $100,000 (or four at $25,000) which are now paying about 2% and the bonds are for thirty years. If these bonds do go down in value I am holding them for a full ten years (since that is when they get down to only being for twenty years)?

Doesn't that leave one in somewhat of almost a market timing position? I'm buying today and selling on one day exactly ten years later? Just those two data points are going to determine whether or not I made a good or bad investment? And, if interest rates end up being consistently higher during those ten years than my initial rate then I'm getting interest income at a real rate that is less that the present real rate for the entire ten year period?

I'm going to answer no, it is not a risk or market-timing. Bear in mind two things:

(1) You will be receiving $2000 a year in coupon payments, which you will presumably reinvest (as two now less-than-$1000 lots) into new bonds, since they have gone down in value and will be a/the lagging asset. In this scenario, the interest rate must have gone up, so you will be buying cheaper bonds for the same coupon payment -- in other words, you'll be getting a higher interest rate on those new purchases. You'll be doing this for 10 years, so an extra $20,000 invested in total, turning your initial 100 lots into at least 120, earning on average a higher dividend.

(2) When you sell in 10 years' time, you will buy new 30-year treasuries earning a higher rate (because, in your scenario, the bonds have gone down in value, implying higher interest rates). You will be buying fewer lots of $1000 (because your initial $100,000 has gone down to, say $90,000, so you will now buy 90 new $1000 lots at auction), but now getting a higher coupon, so no major difference overall in the value of the bonds, apart from greater volatility of the new 30-year bonds.

There is, however, the taxation angle to consider. If you are forced to sell after 10 years, it might not be good timing from a tax perspective, but I don't think it's a problem from a market-timing perspective.

And, now getting back to the current bond "high". Buying a bond when the interest rate is presently so low (less than 2.0%) it seems that the only way I can make money during the next ten years on this bond purchase is if there is some serious deflation which drives interest rates even lower.

We have had 40 continuous years of lower interest rates, with inflation all the way. Yields can still go down from here without serious deflation. So you can make money with bonds at 2%. In Europe and Japan the yields are at zero. That's possible in the US, too. So there is that possibility to earn money on your bonds (with lower rates), but also the reinvestment angle I outline above (with higher rates), getting an overall average higher dividend rate. Also, bear in mind that if rates go up, LTTs will be your lagging asset. Any new contributions to your PP and any dividends and interest from the other assets will go into bonds when you rebalance (annually or 35/15). So you will continually be buying into them at higher rates. That sounds like a good thing to me for future PP performance.

Re: The Bond Purchase Question!

Posted: Wed Oct 09, 2019 9:48 am

by steve

Everyone has an opinion but for me it is just easier to use ETFs like TLT, VGLT and EDV

Re: The Bond Purchase Question!

Posted: Wed Oct 09, 2019 11:16 am

by vnatale

Many thanks for the below quick response.

I've just done my reading of it this morning. But tonight I will reread it. My first reaction is that you have both answered many of my questions but, more importantly, allayed many of my concerns.

Assume I was investing $400,000 total. That would be $100,000 in each investment.

Now assume that at a future date I now have $140,000 in bond value and $86,667 in each of the other three investments.

I am now supposed to sell $40,000 worth of bonds and buy $13,333 of each of the other investments.

However, if I bought one T-Bond for $100,000 which is now worth $140,000 what am I doing? Am I selling the entire bond and then buying a new one for $100,000 since you cannot just sell part of a bond? Or, was I supposed to have originally bought four $25,000 bonds? Tonight I reread in Craig / Tex's book about buying the bonds and while the book is incredibly detailed in just about every other area there is zero detail regarding what I am asking here.

When you buy a bond from a broker, you typically buy them in lots of $1000 (and I believe from Treasury Direct you buy them in lots of $100). So in your example of $100,000 initially in bonds, you would have bought 100 lots. If you had to sell $40,000 worth, you'd be selling about 30 lots out of your 100. Each lot would now be worth $1400. It's not something to worry about.

Second question. I buy a bond for $100,000 (or four at $25,000) which are now paying about 2% and the bonds are for thirty years. If these bonds do go down in value I am holding them for a full ten years (since that is when they get down to only being for twenty years)?

Doesn't that leave one in somewhat of almost a market timing position? I'm buying today and selling on one day exactly ten years later? Just those two data points are going to determine whether or not I made a good or bad investment? And, if interest rates end up being consistently higher during those ten years than my initial rate then I'm getting interest income at a real rate that is less that the present real rate for the entire ten year period?

I'm going to answer no, it is not a risk or market-timing. Bear in mind two things:

(1) You will be receiving $2000 a year in coupon payments, which you will presumably reinvest (as two now less-than-$1000 lots) into new bonds, since they have gone down in value and will be a/the lagging asset. In this scenario, the interest rate must have gone up, so you will be buying cheaper bonds for the same coupon payment -- in other words, you'll be getting a higher interest rate on those new purchases. You'll be doing this for 10 years, so an extra $20,000 invested in total, turning your initial 100 lots into at least 120, earning on average a higher dividend.

(2) When you sell in 10 years' time, you will buy new 30-year treasuries earning a higher rate (because, in your scenario, the bonds have gone down in value, implying higher interest rates). You will be buying fewer lots of $1000 (because your initial $100,000 has gone down to, say $90,000, so you will now buy 90 new $1000 lots at auction), but now getting a higher coupon, so no major difference overall in the value of the bonds, apart from greater volatility of the new 30-year bonds.

There is, however, the taxation angle to consider. If you are forced to sell after 10 years, it might not be good timing from a tax perspective, but I don't think it's a problem from a market-timing perspective.

And, now getting back to the current bond "high". Buying a bond when the interest rate is presently so low (less than 2.0%) it seems that the only way I can make money during the next ten years on this bond purchase is if there is some serious deflation which drives interest rates even lower.

We have had 40 continuous years of lower interest rates, with inflation all the way. Yields can still go down from here without serious deflation. So you can make money with bonds at 2%. In Europe and Japan the yields are at zero. That's possible in the US, too. So there is that possibility to earn money on your bonds (with lower rates), but also the reinvestment angle I outline above (with higher rates), getting an overall average higher dividend rate. Also, bear in mind that if rates go up, LTTs will be your lagging asset. Any new contributions to your PP and any dividends and interest from the other assets will go into bonds when you rebalance (annually or 35/15). So you will continually be buying into them at higher rates. That sounds like a good thing to me for future PP performance.

Re: The Bond Purchase Question!

Posted: Wed Oct 09, 2019 12:51 pm

by ochotona

To buy bonds at Schwab you pay $1 per 1 bond, or 0.1%. For a $250,000 bond purchase if you have a $1 million portfolio overall assuming standard PP allocation. That's a $250 fee. That's significant.

They don't charge for new issues only secondary market offerings.

Re: The Bond Purchase Question!

Posted: Wed Oct 09, 2019 1:07 pm

by vnatale

I am ALMOST certain that Vanguard does not charge anything for bond purchases. Those here who have made bond purchases in Vanguard can verify whether what I just stated is true.